6. Current Government Policy Will Soon Be Ineffective

America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.

– Abraham Lincoln

Success is a lousy teacher. It seduces smart people into thinking they cannot lose.

– Bill Gates

(Video). We are finally in a time where insufficient awareness of the accelerating rates of technological change and economic growth has tangible costs to governments and the citizens under them. The incorrect approach can lead to deflationary crises, while the correct approach can monetize this acceleration to a degree that lifts all boats. Continuing with legacy economic, fiscal, and regulatory policies in an era where the ATOM is now more advanced is analogous to continuing to feed baby food to a person who has long since outgrown it and now requires an adult diet.

Most of the next section is specific to the United States, but other developed countries face most of the same circumstances, and require very similar solutions.

Everything About the Current US Tax Code is Problematic : The current US Federal tax code involves layer upon layer of taxes and exemptions that were each enacted without sufficient holistic assessment of how the new provision fits into the existing tax code. The outcome is a labyrinthine morass of esoteric gobbledygook that combines the worst of all worlds, and greatly obstructs the US economy from creating jobs.

First, consider the tortuous filing and collection process. The tax code has layers of contradictory types of taxes, and a vast range of loopholes and legal shelters to avoid each of those types of taxes for those wealthy enough to hire the appropriate tax lawyers. There are so many such loopholes that some have only three attorneys in the entire country specializing in that particular tax structure, each charging five-digit fees or higher to create the structure. Add to that the practice of private rulings, where a particular person can petition the IRS for a specific case interpretation unique to that individual and unusable by anyone else. This reaction to tax complexity is against the grain of uniform laws. As a result, not only has it become impossible to tax the very wealthiest people, but the cost of compliance with such a complex tax code itself wastes billions of hours of productive time each year, amounting to as much as 20% of the tax ultimately collected. This should be the easiest aspect of the tax debate on which to gain consensus, yet it is the least discussed.

But that is just the beginning, for once a person or corporation figures out what they owe, the tax code itself is structured such that the most productive work of all is what precisely falls under the most onerous taxes. The United States has one of the most progressive (i.e. top-heavy) income tax codes in the world, and it has become even more progressive in recent times, with talk of skewing that even further. The tax code is at the point where even slight increases in tax rates invariably crushes productivity by a disproportionate magnitude, particularly when a state or local tax rate rises in addition to the increase in Federal rates enacted at the start of 2013. Whatever you tax more, you get less of, and productivity is far too precious to be taxed at the current rates of up to 55% for higher income people in California, New York City, and other higher-tax localities. These locations attracted the highest taxation because they also happen to be the greatest fountains of potential productivity.

Once you exclude the 10,000 or so ultra-wealthy households and their custom tax structures, we see that the upper-middle-class and the near-wealthy are the most heavily taxed people in America. This chart from Prof. Perry illustrates how tilted the brackets have become. The top quintile pays the most disproportionate share of taxes, even though many of these households live in those same high-tax states and cities which additionally happen to have expensive housing costs. As explained before, the least-understood aspect of the tax code amidst the debate about ‘fair’ tax rates is the fact that increasing the tax rate does not capture taxes from the ultra-wealthy (the top 0.01%). The burden instead falls on the upper-middle class, which results in a perverse penalty on some of the most productive workers. Unfortunately, most political posturing does not distinguish between those in the 81stpercentile and those in the 99.99th percentile, which leads to tax changes that end up having the opposite effect from what was ostensibly intended.

The next problem is the Social Security tax, which unlike the progressive payroll tax, is regressive. The employee and employer jointly pay 12.4% of the employee’s salary up to a cap of $120,000 in 2016, as an additional tax, split equally between the two. As this is combined with ordinary income tax, it creates a series of peaks and valleys that complicate what each additional dollar of income will be taxed at. If both ordinary income tax and Social Security Tax are flawed, then levying the two of them in tandem is even more counterproductive than either by itself. If that were not enough, there is a further Medicare Tax of 3.8% levied on all income. While the employer pays half of this for an employee (resulting in the salary being accordingly reduced), a self-employed person pays the full tax himself. The fact that this is yet another separate category of taxation, against which some deductions that may apply to other income do not apply, adds even yet more to the nightmare. Lastly, if you thought you were finished, you are really only at the midpoint, for you now have to do an entirely new process to see if your income is compliant with the second tax code, the Alternative Minimum Tax (AMT). After you do both calculations, then you pay the higher of the two. All of this results in a situation where the ‘published’ tax rate and actual tax rate are widely divergent, and force too many decisions to be based on tax optimization, which in turn become suboptimal decisions for growth.

Finally, lest anyone think their income is not, and will never be, high enough for tax complexity to affect them, remember that employers have to file corporate tax returns, so these costs reduce the number of jobs they can create. It is logical to conclude that an unemployed person with no income bears a huge cost of tax complexity, simply by the hidden viscosity consuming the resources potential employers may have used to hire an employee.

Now, I am going to extend sympathy to a group of people that no one else extends sympathy to – the Internal Revenue Service. What is overlooked by the public is that the IRS has to enforce a tax code that is given to them by the US Congress, which, over time, has become a humanly impossible job.

Congress makes endless modifications to the tax code for purposes ranging from political reciprocity for wealthy donors, to electorally-geared rhetoric designed to court a target demographic. The IRS has very little input into these modifications, yet the IRS nonetheless has to enforce the ever-mutating tax code given to them. The President and Congress may authorize an increase IRS staffing, but even this is deep into the zone of futility, because as the complexity of the code rises, the number of auditors needed does not rise in proportion, but rather as a square of the complexity increase. If the code becomes twice as complex, it takes four times as many examiners to audit all returns, ensuring that complexity can eventually surpass any realistic staffing increase or improved training of examiners. Additionally, a tax expert who is extremely well-versed in important parts of the tax code can earn a seven-digit income by working at an elite law firm or as the head of tax strategy and structure for a large, multinational corporation. The IRS has little chance of hiring or retaining the few such experts that exist while bound by government salary grades. AI is not the solution to the processing of tax returns either, as any AI significantly more advanced than TurboTax will keep arriving at the conclusion that the tax code itself is the bottleneck to productivity.

Ultimately, the cumulative frictions of tax complexity and excessive taxation of productivity are a huge burden on all workers and entrepreneurs, yet hard for the public to visualize as there is no window into an alternative universe of simple, light taxation. We may be accustomed to this code, but the effect on the US economy is analogous to forcing a person to breathe with only one lung.

Conventional Wisdom on Monetary Expansion is Flawed : As of 2016, there are two fundamental problems with the way the Federal Reserve has created money to offset deflation, the source of which is still not being correctly attributed to technology. The first problem is the belief that each round of QE will be the final one. The second problem is that it is done in a very indirect and convoluted way that disproportionately concentrates the QE money in very few hands. This current approach to expansion leaves the US economy unequipped to deal with the next major recession and financial crisis.

In the US, the Federal Reserve creates money by purchasing treasuries of various maturities, as well as mortgage-backed securities (MBSs), and holding them on the balance sheet. The purchase of treasury debt by the Federal Reserve enables the US Government to lower the interest rate on the debt it issues, so that it can spend more than it collects in taxes.

The belief that the assets will be sold back has induced a selection that only the most credit-worthy buyers would prefer (namely the US, Chinese, and Japanese governments, and the largest banks), hence concentrating purchases in just these assets. Unfortunately, this sort of artificial reduction of yields favors two asset classes – real estate and the equities of the largest corporations through share repurchases financed by issuing corporate debt. If we exclude the effect of international monetary expansion on US assets for the time being, we can see that no other asset type is nearly as equipped to convert Federal Reserve bond buying into price increases. So these two assets rise and fall in price in direct tandem with monetary expansion, while other formerly correlated assets underperform.

Above and beyond the unsustainable distortion that occurs by producing QE money in such a narrowly concentrated manner, monetary expansion with the overt goal of inflating asset prices is itself an ineffective and unsuitable tactic for uplifting the prosperity of average people. In fact, it makes average people much more vulnerable to short-term market volatility than ever before, which creates a long-term milieu of anxiety.

The problem, in a nutshell, is that about 80% of the American population simply does not have the ability to accumulate a substantial net worth (say, several years of living expenses in liquid assets). To accomplish this requires a diverse set of character traits and skills, such as portfolio management, business-cycle awareness, advanced tax code knowledge, deferred gratification, and the utmost importance of having more than one stream of income. It is quite unfair to expect all households to be savvy to these various factors that determine net worth, especially when nothing of this sort is taught in the formal K-12 school system. This toolbox of skills is uncommon, which is why we often see people with high income yet little or no net worth, even if they weren’t flamboyant spendthrifts; they just could not sidestep the recession properly.

For this reason, inflating the prices of a few select assets is not the way to improve working class, middle class, and even upper-middle-class prosperity. It does not even benefit all wealthy people, but merely the small fraction of those who happen to be positioned closest to the central bank monetary spigot. This greatly muddles the picture regarding whether a fortune was generated via entrepreneurship or just the connectedness of a crony. While there are sporadic popular protests against entities disproportionally accumulating QE money, this situation is not yet receiving as much populist ire as it soon will. This is because the other asset class being inflated, real estate, has lulled the average household into a stupor of complacency sustained by the vapors of their home equity gains.

The US is in a Real Estate Trap : Conventional wisdom has beatified the status of residential real estate as an absolute must for anyone who can remotely manage to purchase it; an asset class that somehow transcends mere financial properties to become an indicator of a person’s self-worth. To question the sacred article of faith that a home always rises in value can get you socially blacklisted, even after the 2008 real estate bust. Some of this stems from the fact that until a century ago, land-owners were citizens with many special privileges (such as voting rights) unavailable to the landless. This made real estate the most visible demarcation of social class, and even the basis of many surnames. Old beliefs are durable, and even people who readily accept that commercial real estate is governed by the same economic fundamentals as other asset classes nonetheless insist that the addition of a kitchen and bathroom(s) somehow exempts the property from the invisible hand of market forces. For this reason, residential homes have become deeply entangled in the politics of economic conditions, and in turn, with the Federal Reserve’s monetary actions.

Decades of marketing has manipulated the emotional aspect of home ownership to convince Americans that they ‘own’ a house even if they have borrowed 80% or more of the price under relatively inclement legal terms. In reality, one only owns the dwelling they occupy if the mortgage payments are completed and 100% of the property is owned by the occupants, for if a mortgaged house misses a couple of payments, the mortgage holder will soon discover how few ownership rights he truly has. Furthermore, most US single-family homes are constructed from materials that deteriorate after about 50 years, a reality reflected in the tax code for commercial real estate depreciation schedules. This precludes the possibility of the structure itself rising in inherent value. In addition, nonpayment of property taxes can lead to liens on the home, and outright forfeiture, even if the amount owed is a small fraction of the home’s value. Despite all this, the aura of emotion that surrounds home ownership endures.

But as finance evolved, mortgages have been securitized, and bond yields are being managed by the Federal Reserve. Home prices generally rise and fall with the S&P500, removing the perceived relative stability that real estate is believed to have, particularly if it is leveraged, as most homes are. This means that real estate no longer represents diversification, as a person’s stock portfolio and home decline in value at the same time as when their employment is at higher risk. Both situations are exacerbated by insufficient NGDP, as described earlier.

In the meantime, the Federal Reserve, in lowering mortgage rates through the purchase of long-term Treasuries and mortgage-backed securities (MBSs), is specifically seeking to inflate just one type of asset class and hope that buoys the entire economy. The problem is, any action that increases home prices simultaneously triggers the construction of new homes, thus increasing supply. Hence, any government action to boost home prices is like trying to fill a sieve with water.

Now that mortgage rates are have been at historic lows for many years (often under 3% today vs. 8% in the early 1990s), the one-time boost that home prices can get from rate declines is already incorporated. There is very little room for any further price gains from lowering of interest rates. Add to that the fact that property taxes are now as high as mortgage payments in many locations, and the exhaustion of rate-lowering as a technique to inflate home prices becomes even more obvious. Additionally, demographic factors are moving unfavorably towards housing. The imminent retirement of baby boomers and shortage of new first-time buyers (due to a combination of youth unemployment, exploding student loan debt, and a falling marriage rate), means that sellers will outnumber buyers for the first time since data collection began in the late 1940s. Overseas buyers are not numerous enough to affect the total US market, as they concentrate on a handful of specific locations. This is a situation that has never before been seen in the United States since detailed data collection began in 1948.

For these reasons, the current style of monetary policy is near the end of its efficacy, and US home prices are reaching a near-permanent ceiling in at least 95% of the nation’s zip codes. Under current trends, by approximately 2017-18, there will be another correction in real estate and equity prices, at least as severe as the one in 2008. No amount of further bond and MBS purchases by the Federal Reserve will be able to forestall it, since those approaches are effectively of a ‘fighting the previous war’ nature.

The Federal Reserve is Cornered : To review the previously established concepts, the Federal Reserve does not have to overcome just one ideological barrier, but five. The needed paradigm shifts are :

Monetary expansion has to be permanent and declared as such, instead of one-off programs tied to an assumption that each one is the final round of Quantitative Easing. Actual increases in the Fed Funds rate will be very-short-lived. Ironically, Japan and the EU are already in a mode of de-facto perpetual monetary expansion, even though the US pioneered the idea.

The Federal Reserve balance sheet can be retired, as the assets held on it will never be resold back into the market, and no such expectation needs to be sustained. The expectation itself has contributed to QE exclusively purchasing US Treasuries and MBSs, rather than riskier assets where the economic effect would have a higher multiplier.

World money creation has to rise at 16-24% a year, possibly higher, to offset technological deflation and keep the Wu-Xia Shadow Rate in step with the size of the deflationary force.

It matters relatively little which country’s central bank commences a QE-type program, as the liquidity effect quickly flows across the rest of the world if the program is diffuse enough.

Therefore, despite international monetary action, US programs can no longer be concentrated in just Treasuries and MBSs. They have to be of a more direct, diffuse, and permanent nature.

If that were not enough of a summit to scale, the powers of the Federal Reserve are defined by Congress, and an expansion of Federal Reserve power will surely be a tough sell to the Senate and House at this time. Even if the majority of Congress were amenable to such a broadening, there may be Constitutional Amendments involved. Hence, the debate and legislative drafting process could be lengthy and hostile, and will only be expedited when a crisis is already underway. Barring a political miracle, the Federal Reserve will not be granted the powers to generate money with the versatility and precision to alleviate the next storm.

The Federal Budget No Longer Has a Buffer : The current fiscal and monetary policies have created a distinct if uneven economic recovery, with the job market and S&P500, as of 2016, both having experienced a run better than they have in many years. Unfortunately, many of the measures taken have only delayed certain inevitabilities. The current pattern of government spending has increased the debt levels to a point where there is no longer the customary buffer to cushion against the next disturbance.

At the peak of the 1990s economic cycle, there was actually a brief budget surplus as high as 2% of GDP from the unexpected surge in tax receipts from the equity boom of the era. The subsequent recession caused the customary revenue crash and hence a deficit. The peak of the next business cycle, in 2007, had a deficit of -1% of GDP. Observers considered this to be acceptable, but at the peak, there needs to be a surplus, if only to offset the deficit on the next recession. Sure enough, the crisis of 2008-09 saw huge deficits.

Writing this in early 2016, many of the classical indicators are pointing to us being at or near the cyclical peak. Yet, the deficit is still -3% of GDP. Key figures in the government consider this to be good, just because the deficit has been going down from the extreme depths of 2009. But for the deficit to be -3% during the best years of a business cycle, even after three rounds of QE, is quite alarming. How deep will the deficit be during the next crisis, given that the deficit is already so much higher than it was in 2007? Comparing peak years of each cycle is the only appropriate ‘apples-to-apples’ comparison, which people will soon be reminded of.

The chart indicates that the Congressional Budget Office (CBO) has projections for the next ten years. Apparently the expectation is that there will be only tightly managed deficits that cling to the long-term average, even though recessions see steep deficit explosions as tax revenue falls. What, exactly, about the last two recessions provides any reason to believe that the next 10 years will be so controlled? If the deficit in the best year of the business cycle is -3% of GDP, there is every reason to think that this is a continuing patterns of lower lows and lower highs. A deficit that surges to unanticipated heights has manifold perils, most importantly the reduction of tools available to the government to hasten a recovery.

It is not that the people at the CBO are incompetent – they are just trying to do their job as best they can. The problem is that the primary prerequisite of a recession is the elapsed time since the previous recession. This induces too many people, including government budgetary forecasters, to forget the periodicity of recessions, and become complacent. When that is combined with the other factors we have discussed, such as accelerating technological deflation, inadequate methods and continuity of monetary expansion, and the cornering of real estate as an asset class, the implications are ominous.

2017 : The Next Financial Crisis Begins : As Nasim Taleb has explained in his books The Black Swan and AntiFragile, policies that aim to micromanage the smaller risks in a complex system greatly increase the risks from major events. This is unfortunately the situation that many governments have created today.

All of the aforementioned troubles will reach a combustion point starting in the year 2017, give or take a few months. The only way to avoid it is either a paradigm shift in monetary creation to be more diffuse and exponential, or a massive decrease in regulation and tax complexity. Barring this, the upcoming financial crisis will be at least as severe as the previous one (2008-09), and has the added obstacle of being resistant to the type of liquidity actions that worked in the previous instance. To fully illustrate how severe the situation may be, we have to consolidate the looming factors, which in combination are greater than the sum of them individually.

1) The central banks of the world are collectively not creating money in a manner that diffuses broadly, or in a quantity and permanence that keeps inflation and NGDP synchronized with the exponential growth of the ATOM. Hence, world monetary expansion by 2017 might be running at less than half of the estimated $400 Billion/month needed under by that point just to keep up with the level of technological deflation. Technological progress always finds a way to revert back towards the long-term trendline. Since the rate of change has been below the trendline for so long, perhaps the reversion necessitates enough technological deflation to force a severe correction in the financial markets. Such a correction will frighten central banks to crank up the monetary presses until deflation is overcome and the ATOM has sufficient fuel.

While the crisis can be avoiding by rapidly changing the style and amount of QE as per the above, remember that central banks are not yet even close to thinking in terms of exponentially-rising money creation, even though this era is already well underway. I cannot overstate how quickly and seemingly without warning an exponential trend can overtake an inadequate linear policy solution.

2) US home prices are reaching a long-term ceiling, given that mortgage rates are so low that property taxes are a larger annual expenditure than mortgage interest. Further Federal Reserve purchases of bonds and MBSs are now past the point of diminishing effect in boosting home prices. Yet policymakers and the real estate industry still do not appear to have any new paradigm that the baton can be passed to, and will be caught unprepared for the end of this era and the complex ripple effects of it. Since home equity has been the sole source of net worth for many middle-class people, this stagnation will be problematic for consumer confidence.

3) US National Debt is now over 100% of GDP, and the budget deficit is much higher than it was at previous business cycle peaks in 1999 and 2007. This leaves the US without the fiscal buffer that has mitigated recessionary deficits in the past, ensuring that the upcoming crisis has deeper deficits than the 2008 crisis. Additionally, this makes the US vulnerable to debt downgrades at precisely the time that tax revenue is crashing and sentiment is weakest.

The US National Debt is not high at all in relation to the present value of future GDP under the accelerating economic growth rate discussed earlier, nor are the annually accumulating budget deficits that created it. Alas, since current fiscal and monetary assumptions do not account for this, the current debt situation is ominous given how institutions and individuals may react to frightening headlines during the upcoming recession.

4) By 2017, the median baby boomer will be 62 years old. A person’s contribution to GDP is very unevenly distributed across their lifetime, and when baby boomers were at the age of buying homes and starting families during 1982-99, the economy enjoyed that tailwind. Now, the same cohort is older and ramping down their consumption en masse, so a corresponding and proportional economic headwind is emerging, without enough young people to offset it. This additionally means that the number of recipients of Social Security and Medicare is about to rise, while the number of taxpayers is not rising, exacerbating point 3) above. While this effect does not manifest all at the same time, it is a force soon to exert additional downward pressure on the GDP growth trajectory, making the recession deeper.

5) Small market corrections may provide the illusion that the excess has been removed, but years of low readings on the ^vix volatility index and record margin debt can only normalize through a recession. This process includes a severe bear market in equities, and a multi-month failure to rally from those lows. These stretched parameters are a byproduct of the asset-boosting policies of the Federal Reserve, which as described earlier, cannot help but trap many people into buying too much, too high. We have not yet seen Dow 10,000 for the last time.

6) China’s Nominal GDP in 2017 will approach $13 Trillion, or about 67% of what US GDP will be at the time. This will mark the first time in over 35 years that there is any other country with an economy that remotely approaches the size of the US economy, with the added certainty of retaining that status permanently. That such a large economy emerged so quickly, and via a system substantially different from that of any of the G7 economies, will cause the tectonic plates of the world economic order to shift somewhat, as the assumptions underlying many valuations get revised. There is nothing wrong with that, but the process will add some untimely volatility to markets already convulsing from the first five factors listed above.

These six factors are converging into a menacingly dark cloud on the horizon, and while every detail of the crisis cannot be predicted, the general script is emerging. The most unanticipated challenge with the upcoming crisis will be that the levers used to alleviate the pain of the 2008 crisis will be futile this time. Even worse, markets that feel they are at the mercy of politicians rather than economic or technical forces are particularly prone to volatility.

While waiting for the political process to catch up, the equity market may fall 40-50% from its highs. Real estate will once again crash, sending millions of homes hurtling into negative equity. This will lead to several million jobs lost, widespread panic, and some violent social unrest. However, much of this can still be avoided if swift implementation of certain comprehensive augmentations is executed.

My mission is to present potential solutions, derived from my proprietary research (available to suitable clients), and get as much exposure to these ideas as possible. The summary of the solution detailed in the next few chapters is that the amount of monetary action needed just to halt deflation will be as high as $400B/month by 2017, and has to rise at 16-24%/year thereafter. Additionally, this money has to be distributed in a diffuse manner, going directly to individuals. The crisis can still be avoided if all of these upgrades are enacted in 2016, but the probable failure to do this will precipitate the aforementioned crisis. Over time, this perma-QE can replace many types of government spending, and hence the taxes that fund such spending. For details on how I arrive at this set of recommendations, read on.

While I am under no illusion that policymakers will read, debate, refine, and implement the ideas presented here in time to prevent the crisis starting in 2017 even if there is a lot of grassroots support, the following solutions may nonetheless resemble policies that are fast-tracked in the midst of the turmoil. These solutions may thus become entrenched programs in the era following the crisis.

Additionally, demographic factors are moving unfavorably towards housing. The imminent retirement of baby boomers and shortage of new first-time buyers (due to a combination of youth unemployment, exploding student loan debt, and a falling marriage rate), means that sellers will outnumber buyers for the first time since data collection began in the late 1940s.

According to Bill McBride from Calculated Risk, demographics trend will be improving in the US in the next few decades. Can you comment?

Bill McBride says that the number of working-age people is now rising. That does not mean that they automatically translate into housing demand. Plus, as more boomers hit 65, there will be an exodus from the ranks of working-age people, even if for a year or two it seems that the working-age population is rising. Much of the rise is because the exodus did not begin before the small number of new 22 year-olds entered.

Also note that even if the number of working-age people remains decent :

a) Student loan debt will delay house-purchases by years, for millions of them.
b) The marriage rate is falling, as young people don't find marriage as compelling. This means that the *composition* of housing being demanded will be different, with more people in condos their whole lives and fewer buyers for 4-bedroom suburban homes.
c) A lot of the young people entering working age are from lower-income ethnicities. This ensures that they cannot prop up the housing market as they are not like-like replacements for aging boomers.

A certain type of housing (the 4 bdrm single for example) is now persecuted by a majority of citizens that have embraced environmental totalitarianism. These forces work towards a supply restriction and thus eventual scarcity developing in those market segments.

Look at Europe for what lies ahead for the US. Few people have 4 bdrm single family houses, and that is not because they don't want them or because they voluntarily moved away from desiring them.

I was born and grew up in Europe. The housing prosperity we have here in the United States is by comparison astronomical. And it will not last since most Americans seem fatally attracted to the European societal model (the 1% growth continent in a 4% growth trendline, go figure, but that's what it is).

I'd also like to know why should I work if helicopter money is going to rain from the sky in the future. Even more important, why should my children have any ambitions and work hard? Why not take it easy? Seems like some significant benefits will unconditionally rain from the sky, redistributed benefits from the few that can now produce a lot due to technological leverage.

And why would my country, with such a demotivated, central bank redistribution welfare pampered workforce, have enough productivity to remain in the developed world of 2080?

A certain type of housing (the 4 bdrm single for example) is now persecuted by a majority of citizens that have embraced environmental totalitarianism. These forces work towards a supply restriction and thus eventual scarcity developing in those market segments.

It also depresses demand. Plus, there is no restriction in places with higher birthrates (such as Texas).

I was born and grew up in Europe. The housing prosperity we have here in the United States is by comparison astronomical.

Europe's population density is much higher then the US. Key metros like NYC and SFBA are as expensive as London, but the suburbs of Tier 3 cities in the US are the cheapest housing of any first-world country.

I'd also like to know why should I work if helicopter money is going to rain from the sky in the future. Even more important, why should my children have any ambitions and work hard?

The people with that mentality are not the ones who generate the most productivity. The most productive people continue to work long after their net worth surpasses $5M, $10M, $20M, etc....

Plus, as the article states, when income taxes are zero, the incentive to work is much higher. You are taking only one side of the ledger into account. With no income tax, the incentive to work is much, much higher.

"The first is the speculation that such a stipend will merely create a leisure class out of the bottom 60-80% of the population, who spend their lives immersed in various types of home entertainment. They may do nothing else with their time and do not set good examples for their children, who then fail to grow into productive innovators that sustain the ATOM. Putting aside the fact that such a concern is mutually exclusive with worries that AI will leave millions permanently unemployed, or that healthcare costs are surpassing affordability, it is unfounded in any event. "

I may be combative, but in a Socratic way. I'm indeed honestly interested (and I'm not saying that tongue in cheek) whether you may help me see another reality and get me unstuck from what seems to be a rather deep rooted narrative. A narrative developed from comparative observation in having lived in a statist continent and a less statist one.

You are the only person I have found so far offering a different narrative worth considering, hence my keen interest.

I have a deep interest in trying to predict the future with a probability that is even remotely better than random. The stakes, both personally and nationally, are enormous indeed.

In that spirit,...

I'm not as productive as the people who earn tens of millions indeed. But I'm productive enough to be in the world's top 0.3%. I may be a tier 3 or 4 compared to the uber productive innovators. However the uber productive innovators still need me. Without me, or with a less motivated me, the über productive may lose enough competitiveness to be overtaken by marginally more productive uber complexes in distant lands -- and then the death spiral begins -- likely already has, as evidenced by our below par growth trendline.

I also think that at the micro-economic level you assume too much about some rather binary nature of productive people. Does the US have the only naturally motivated people?

More to the point, I may be productive enough to be in the world's top 0.3% (American mid upper class, the three percenters) however I've always found the hippie life of some of my immediate relatives attractive. I'm rather certain that had I not migrated to the US -- where the rich are less taxed and the less productive are less insulated from the consequences of mediocrity -- I would have settled into an easier less ambitious European life. A life of being only a quarter as productive as I am today, earning one quarter of what I earn today and being a quarter less helpful in helping realize the vision of the uber smart who indeed change the world through the leverage of technology. These less motivated people, these people living in the flatter effort-reward curves of Europe, are the T.S.'s who help the, say, French uber productive. That is why there's no French Steve Jobs, Larry Page etc.

All summed up, I still prefer what I did by immigrating to the US -- but not by a wide margin!

If you offer me the European quarter prosperity life, without any work at all, then I may just take it. If not me, many people at the margin will. Then, once a few uber innovative companies start falling to international competition, some uber productive people, at the margin, will say "heck not worth it wasting my youth over this, the reward is just not a high enough multiple to lose sleep, increase chances of pancreatic cancer etc. ". This is, after all, the predominantly failed fate of the uber productive amongst the French who tried. After a few intergenerational experiences at this failure you stop trying. Low ambition and survival in mediocrity become internalized into the dominant national culture. And, as the uber productive fall, they drag down some of us 3 percenters (3 percenters in the US = 0.3 percenters worldwide) and we then drag down the middle class, their mechanics, their gardeners, their house cleaners. Essentially, the death spiral to a one percent European trendline growth country in a world that is riding a four percent trendline and, as you brilliantly point, ever accelerating!

But perhaps most important,

Your point about the abolition of the tax disincentive more than compensating for the helicopter allowance disincentive is very well taken. However...

once I get that steady quarter income while the presumably more "genetically programmed/addicted to ambition" uber rich continue to earn tens of millions (according to your narrative they are apparently immune to international competition) why not get my pitchfork out, together with the other 99% and vote to double, then quadruple, then octuple etc. our unconditional helicopter allowance? The argument we are earning 40k, 80k, 160k, 320k while they earn 400 times that will always hold -- and as you point, will even accelerate. With such a strong majority, "of course we can, and will!" What would prevent that from happening? The fact that the ATOM may be slowed down just enough to be overtaken by the ATOM of other countries? Do you think we understand those things as voter-lemmings?

If we did understand we would not be paining for candidates that will further flatten the effort-reward curve while our country's growth is already in a structurally anemic 2% growth trendline, half the world average. We don't even understand the deterministic arithmetic of exponents of decline!

For the time being I still see your theory the same way as I see Marx's theory: Very sophisticated and conceived by a very brilliant person indeed. But one fatal flow for Mr Marx: People have little desire to work for distant unknowns, and coercing them to do so does not work -- at least not to the extent of preventing other marginally more motivated people in other countries from overtaking them. I'm, of course, not implying that this is also the flaw of your theory. I have a hunch there is some fatal flaw in your theory and I'm trying to either find it or be convinced to your line of thinking.

Now, having said that, I do believe a distortion crisis, one much bigger than the previous one, is in the cards. But I think that the distortion is the distortion of a developed world who is trying to desperately cling on to its supremacy by flattening the effort-reward curve. The slow growth and desperation of decline this causes will predictably and reflexively lead voters to get out their pitchforks and demand even further flattening of the effort-reward curves --and thus cement the stranglehold of a classic vicious cycle to decline. A vicious cycle few countries will escape, though some will emerge battered but freer to lead the next burst in a yet more inevitable successful branch of humanity. The ATOM will indeed advance and, though I agree with your prediction, I don't quite see eye to eye in some of your more pivotal explanations and remedies.

In my estimation it matters little what form this flattening of the effort-reward curves will take, it being helicopter allowance or what have you. This distortion is coming close to an uncontrollable breaking point.

The enormous leverage of technology is creating and will continue to create enormous inequalities. Those electorates that can live with that will prosper, even if unequally so. Those who find these growing disparities unbearable will find themselves all more equally poor. Better of than today but poor by the fantastic living standards of the latter half of this century.

The middle income country of the 2070s will have a much higher living standard than the US has today. But will you want to be in a middle income country in 2070? Would you be happy living in today's Angola under the consolation that the standard of living is better than 1880s London? We do judge prosperity in relative terms, after all. That is exactly why we are envious of our neighbors and the big house in the cup-de-sac in the first place.

Hence the voter-lemming's conundrum: Accept the mansion in the corner without envy, or become the more equal citizen of a middle-income country by the latter half of this century.

But I'm productive enough to be in the world's top 0.3%. I may be a tier 3 or 4 compared to the uber productive innovators. However the uber productive innovators still need me.

Then you should still be very excited about the phase-out of income taxes. Your (after-tax) pay from your job is set to rise a lot, on top of the DUES. I don't think you will reach a point when you decide not to work if it involves turning down what will by then be a $300,000 job with no income tax, 10 years from now.

I also think that at the micro-economic level you assume too much about some rather binary nature of productive people. Does the US have the only naturally motivated people?

I don't see the productive Europeans retiring early either. They keep going.

That is why there's no French Steve Jobs, Larry Page etc.

There does not need to be, as the ATOM knows no international boundaries. Sergey Brin and Elon Musk were immigrants to the US, as you mentioned.

If you offer me the European quarter prosperity life, without any work at all, then I may just take it.

I don't think you would, if you were younger than, say, 70. Keeping up social status is one form of pressure. The higher pay of existing jobs is another. The chance of more careers closer to what you really want to do, is another.

If not me, many people at the margin will.

Some may, but those people were not essential to ATOM advancement to begin with.

In the 19th century, there was no end to authors writing about how once basic needs are met, people will work fewer hours. Their definition of 'basic needs' from their point of view was so low that in the US, that would take the average person just 10 hours of work per week. Yet, that did not happen. New products and services become desired. Many things that you do for fun, and would not want to give up, are things your grandparents never even considered to be available to them. Internet access, for one thing.

Even today, you can move to India and live in an Ashram where room and board are free (paid by donors). Your only job is to meditate, teach children to meditate, tend the garden, etc. No stress and no money needed. Perhaps boring, but also fulfilling.

according to your narrative they are apparently immune to international competition)

This situation is possible in all countries of ATOM density. Have you read Chapter 10?

The fact that the ATOM may be slowed down just enough to be overtaken by the ATOM of other countries?

The ATOM has no borders, only minor ebbs and flows based on the policies of one country vs. another. All major technologies immediately become available to all who can afford them, irrespective of which (stable) country they live in. When a VR Headset is released by Facebook or Samsung, is it not released in France and Germany almost on the same day?

People have little desire to work for distant unknowns, and coercing them to do so does not work

This is not coercion. This is in fact an unprecendented high level of freedom and autonomy, with a major reduction in government meddling. The ATOM dues monthly increment is calculated in a very formulaic and transparent way.

Would you be happy living in today's Angola under the consolation that the standard of living is better than 1880s London?

That comparison is useful in some areas, but not others. It is amazing to think that just 100 years ago, 1.3 million W. European soldiers killed each other in the Battle of the Somme. Today, that is the sort of thing we expect nowhere except the Congo or Middle East.
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Keep in mind another dimension, which is that once AI can advance without any human assistance, technologies that increase human living standards may plateau. That is some decades away, but humans are not the final stage of the procession at all.

Well, sorry for posting comments that may be generally boring, but I'm not convinced.

I don't agree that a helicopter allowance is not coercion. When some people work for their reward (however high) and some get rewarded in addition to the market value of their production then it is at least unwilling redistribution.

Your conjecture is that the ATOM produces so much wealth that whatever amount of redistribution occurs through the helicopter allowance is relatively small, smaller than current taxes, and thus has little impact on incentives.

But, as you said, standards of living, and thus expectations, will rise to unimaginable levels, and so will our political and electoral demands out of the helicopter allowance and the ATOMs energy.

So I would probably turn down that 300k job, since it will be much easier to get together with my supermajority buddies and vote to increase our helicopter allowance to 300k. Working for Larry Page (the demands of the ATOM) is not that easy of a job, you know. So when I see the ATOM morph Larry Page into Larry Page squared, I'm going to want a bigger (much, much bigger) helicopter allowance. If I get 150k from the ATOM then perhaps I'll just retire to the lake, or just find a part time job where I produce one third of what Larry Page demands and earn 100k just to top off my helicopter allowance. I'm also confident that with a little bit of political campaigning and a solid 90% percent supermajority I can get the ATOM to shell out the full 300k. The less productive people at the firm who depend on my 300k job? Oh well, good luck to them, they'll figure it out.

Your theory seems to me more along the lines of the old hippie dream with different mechanics: "The machines will produce so much that we will no longer have to work (much). Some people will have more but a basic decent living will be available to everyone from the work of the machines (and the helicopter allowance in our case)".

Oh well, I guess the hippies grew up and now they want more. The "basic decent living" of yesteryear is no longer "decent". It's poverty! They now want a twenty first century lifestyle, of course. Just like I will want a Larry Page lifestyle and will vote to get enough helicopter allowance to approximate it.

Sure, things could become so different that things as we know them (indeed they will become different sooner than most realize) such as voting, our descent into pitchfork democracy, etc. may resemble nothing we know. Well, while I agree that an unimaginable fantastic future awaits, beyond the myopic vision of most voters (talk about the delusion of climate activists who think the world in a hundred years will be more or less like today except warmer) I think we should wait a bit until that future starts to materialize, rather than start right away with the futuristic helicopter allowance.

BTW, do you think the Swiss were wrong to recently defeat their helicopter allowance at the polls? Along the same lines, why not wait for another country to vote the helicopter allowance (Japan is almost doing it indirectly)? Then if it works we join the bandwagon when helicopter allowance 3.0 comes out.

And also BTW, I totally agree with you that most people have their heads buried in the sand minutia of everyday life rather than anticipating the very rapidly changing future, as evidenced by the total lack of writings and discussion on the true future, the unimaginable to us fantastic future that will come much sooner than most anticipate.

I'm saying that not being a young dreamer. I'm actually quite deep into middle age.

P.S. I don't earn 300k (at least not yet, not without a more mature ATOM) but I am in America's top 3%, hence about top 0.3% worldwide.

When some people work for their reward (however high) and some get rewarded in addition to the market value of their production then it is at least unwilling redistribution.

This is better than what exists presently. Remember that 75% of all government spending in the US is a direct transfer. In Europe it is even worse.

So I would probably turn down that 300k job, since it will be much easier to get together with my supermajority buddies and vote to increase our helicopter allowance to 300k.

No. It can only rise at a certain ceiling rate. The Fed governors are not elected, otherwise QE would already be something voters could force even today.

The less productive people at the firm who depend on my 300k job? Oh well, good luck to them, they'll figure it out.

This contradicts your other claim that people will stop working if their basic necessities are met.

As per your comments it appears that you :

a) think that there is not already a massive redistribution underway
b) have not taken into account how much inefficient wastage already occurs, both in taxation and disbursement
c) have surprisingly little awareness how much incentives change when the marginal tax rate goes from 50-55% down to zero.
d) are not aware that $220B/month of QE is already being done worldwide as we speak (see Chapter 4).
e) probably have not read this entire publication.

Read the whole thing.

Too much of your comment(s) are just resistance to change, without seeing how much redistribution and wastage is already happening, and how inferior it is to the DUES program. Plus, it does not appear you have taken into account how much QE is already being done now.

Precisely. Although this only applies to high-income people. The higher one's income, the more methods one has to make their tax rate zero. Mitt Romney got slammed for doing something completely legal in his IRA, but people much richer than Mitt Romney (like Donald Trump, Warren Buffet, and George Soros) do even more elaborate things. It is legal, since the tax code is complex enough to provide far too many loopholes for anyone to monitor.

That is why a 'tax increase' never works, and actually solidifies the ultra-wealthy by removing their upper-middle-class competition...

This is also why high-tax states lose middle-class jobs, but continue to be the leaders in the most profitable industries. Apple, Google, and Goldman Sachs don't pay any significant tax, nor do most of their upper executives.

A 15% flat tax would collect a lot more from the wealthy than the current tax code. But 0% income tax is possible by 2025 under the ATOM-DUES plan, and should be the goal.

I have always been an advocate of a flat tax, or better yet, a VAT system. Complicated laws have a tendency to favor those with the time and money to game the system, which is not coincidentally why large corporations favor more regulation, not less.

Yes. This is why I favor a plan of phasing out all income tax. 0% income tax is the fairest of all (see Chapter 10).

0% tax also means zero filing and compliance burden. The costs of this are astronomical, and no longer needed to fund a robust safety net (a substandard version of which is what most government spending goes towards anyway).

Hi KG, still doing my re-read, you will want to update from your 2017 prediction. Also, from a rhetorical perspective, I would back off from discussing taxes as that pulls people into conventional thinking and arguments. The expansion of the money supply via paying out to the people is your radical idea that you need to sell. People have to buy that first before they will be open to it replacing income taxes. Thanks, Drew